The best books on the impact of psychology on economics and finance

Who am I?

I became a behavioral economist in the 1970s, at the time modern behavioral economics came into existence. Much of my work has focused on the way in which the combination of emotions and deliberative thinking impact the way people make decisions about their economic lives. For over four decades, I have been identifying the fascinating ways in which this two system psychological approach influences the important questions of our day.

I wrote...

Ending the Management Illusion: How to Drive Business Results Using the Principles of Behavioral Finance

By Hersh Shefrin,

Book cover of Ending the Management Illusion: How to Drive Business Results Using the Principles of Behavioral Finance

What is my book about?

Psychologically smart companies manage both the pluses and minuses of human psychology through well-structured systems and processes. In Ending the Management Illusion, behavioral finance pioneer Hersh Shefrin addresses the biases that can take you or your organization off course and shows how to run psychologically smart businesses-specifically as it affects your bottom line.

Shefrin explores the psychological barriers you experience, and delivers concrete nudge-based debiasing techniques for breaking through these barriers. This allows you to integrate your processes for accounting, planning, incentives, and information sharing-the main elements for optimizing corporate value. The proof of the pudding is in the eating. The companies his book discusses which chose to employ these techniques performed favorably in the period following publication, while the companies that chose not to employ these techniques performed poorly, and in some cases disastrously.

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The books I picked & why

Thinking, Fast and Slow

By Daniel Kahneman,

Book cover of Thinking, Fast and Slow

Why did I love this book?

To my mind, this book is tops in providing a general exposition of the two-system psychological approach to analyzing human judgments and decisions. For over half a century the book’s author, psychologist Daniel Kahneman, has been has been a major contributor to the modern psychological approach that underlies behavioral economics. In 2002, Kahneman was awarded the Nobel Prize in economics for his contributions. I feel fortunate to have known him since the 1970s and to have learned so much from him and his late co-author Amos Tversky.

By Daniel Kahneman,

Why should I read it?

37 authors picked Thinking, Fast and Slow as one of their favorite books, and they share why you should read it.

What is this book about?

The phenomenal international bestseller - 2 million copies sold - that will change the way you make decisions

'A lifetime's worth of wisdom' Steven D. Levitt, co-author of Freakonomics
'There have been many good books on human rationality and irrationality, but only one masterpiece. That masterpiece is Thinking, Fast and Slow' Financial Times

Why is there more chance we'll believe something if it's in a bold type face? Why are judges more likely to deny parole before lunch? Why do we assume a good-looking person will be more competent? The answer lies in the two ways we make choices: fast,…

Book cover of Nudge: Improving Decisions about Health, Wealth, and Happiness

Why did I love this book?

Nudge is a seminal work about using psychological insights to help people make better economic decisions for themselves. The principles which authors Richard Thaler and Cass Sunstein articulate in the book are being applied globally in what have come to be called “behavioral insight teams” or “nudge units.” I would call this book a “game changer,” because prior to its publication there was a general view that people are too set in their psychological ways to change their behavior, even when doing so would be to their benefit. The germ of the main ideas in Nudge trace back to work which Nobel laureate Thaler did earlier in his career. Much of this work was with coauthors, of which I was one, which makes me especially appreciative of how remarkable the book is.

By Richard H. Thaler, Cass R. Sunstein,

Why should I read it?

4 authors picked Nudge as one of their favorite books, and they share why you should read it.

What is this book about?

Now available: Nudge: The Final Edition

The original edition of the multimillion-copy New York Times bestseller by the winner of the Nobel Prize in Economics, Richard H. Thaler, and Cass R. Sunstein: a revelatory look at how we make decisions—for fans of Malcolm Gladwell’s Blink, Charles Duhigg’s The Power of Habit, James Clear’s Atomic Habits, and Daniel Kahneman’s Thinking, Fast and Slow

Named a Best Book of the Year by TheEconomist and the Financial Times

Every day we make choices—about what to buy or eat, about financial investments or our children’s health and education, even about the causes we champion…

Irrational Exuberance

By Robert J. Shiller,

Book cover of Irrational Exuberance

Why did I love this book?

The term “irrational exuberance” which forms the title of this book, entered the public lexicon in 1996, days after the book’s author, Nobel laureate Robert Shiller, gave a presentation about stock market bubbles to the Federal Reserve. Alan Greenspan, who was Fed chair at the time, used the term in a public speech; and the rest is history. The book Irrational Exuberance provides an account of how psychological forces generate asset pricing bubbles. The book was published during the dotcom bubble, and proved to be prophetic in the way it anticipated the subsequent housing pricing bubble which preceded the global financial crisis and associated great recession. Readers will find amazing insights in this book, especially about the way that history repeats itself when it comes to asset pricing bubbles.

By Robert J. Shiller,

Why should I read it?

2 authors picked Irrational Exuberance as one of their favorite books, and they share why you should read it.

What is this book about?

In this revised, updated, and expanded edition of his New York Times bestseller, Nobel Prize-winning economist Robert Shiller, who warned of both the tech and housing bubbles, cautions that signs of irrational exuberance among investors have only increased since the 2008-9 financial crisis. With high stock and bond prices and the rising cost of housing, the post-subprime boom may well turn out to be another illustration of Shiller's influential argument that psychologically driven volatility is an inherent characteristic of all asset markets. In other words, Irrational Exuberance is as relevant as ever. Previous editions covered the stock and housing markets--and…

Book cover of The General Theory of Employment, Interest and Money: With the Economic Consequences of the Peace

Why did I love this book?

Keynes’ book is not just a classic, but to my mind is the finest book in economics written in the first half of the twentieth century. Although I studied the book as an undergraduate student, at the time I failed to appreciate what Keynes wrote about the role psychology played in economic decision making. It was only after becoming a behavioral economist myself, and re-reading the book, did I realize that Keynes was a stellar behavioral economist. Although many professionals learn about Keynes’s ideas from other sources, there is nothing like the original. In this work Keynes speaks to us about how human psychology impacts economic decisions and events. Those who read carefully will see that he writes about psychology, optimism, confidence, and sentiment – terms very much in vogue today among modern behavioral economists.

By John Maynard Keynes,

Why should I read it?

1 author picked The General Theory of Employment, Interest and Money as one of their favorite books, and they share why you should read it.

What is this book about?

John Maynard Keynes (1883-1946) is perhaps the foremost economic thinker of the twentieth century. On economic theory, he ranks with Adam Smith and Karl Marx; and his impact on how economics was practiced, from the Great Depression to the 1970s, was unmatched.

The General Theory of Employment, Interest and Money was first published in 1936. But its ideas had been forming for decades ? as a student at Cambridge, Keynes had written to a friend of his love for 'Free Trade and free thought'. Keynes's limpid style, concise prose, and vivid descriptions have helped to keep his ideas alive -…

Book cover of Stabilizing an Unstable Economy

Why did I love this book?

Hyman Minsky might well have been the most underrated economist during the second half of the twentieth century. In Stabilizing an Unstable Economy, Minsky identified the psychological factors that create in financial markets and exacerbate economic downturns. Viewed against the backdrop of recent financial crises, his writings appear prescient. Readers of this book will discover that Minsky explained that the same factors which underlie economic instability also underlie the creative spark that produces economic progress. Readers will also learn that Minsky warned about being naïve in thinking that we can avoid instability.

By Hyman P. Minsky,

Why should I read it?

2 authors picked Stabilizing an Unstable Economy as one of their favorite books, and they share why you should read it.

What is this book about?

"Mr. Minsky long argued markets were crisis prone. His 'moment' has arrived." -The Wall Street Journal

In his seminal work, Minsky presents his groundbreaking financial theory of investment, one that is startlingly relevant today. He explains why the American economy has experienced periods of debilitating inflation, rising unemployment, and marked slowdowns-and why the economy is now undergoing a credit crisis that he foresaw. Stabilizing an Unstable Economy covers:

The natural inclination of complex, capitalist economies toward instability Booms and busts as unavoidable results of high-risk lending practices "Speculative finance" and its effect on investment and asset prices Government's role in…

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